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In two settlements announced last week by the U.S. justice department with German automaker Volkswagen totaling a record $14.7 billion, the company gets a chance to redeem itself somewhat after being caught nine months ago for cheating on diesel emissions tests. The deal is fair to vehicle owners, but the damage to the environment will go unrecompensed, said Wharton professor of legal studies and business ethics Eric Orts and Rena Steinzor, professor of law at University of Maryland.
In an industry that cuts corners too often, corporate structures must have incentive mechanisms to deter wrong behavior and encourage corrective action, they said on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
The settlement requires Volkswagen to spend $14.7 billion to compensate vehicle owners and invest in pollution mitigation and green vehicle technology. It won’t be the end of Volkswagen’s woes, warned deputy attorney general Sally Q. Yates in a statement, and there has been talk of pursuing criminal charges, too.
Here are five key takeaways about the case from Orts and Steinzor (jump to the corresponding spot in the podcast using the time codes provided.)
“It is almost impossible to believe that [in the company’s] marketing department, someone wasn’t aware that there were big problems.”–Rena Steinzor
1. The potential to reoffend: “[It is] very important to deter any future conduct like this,” Steinzor said, pointing out that “Volkswagen is a recidivist here” (06:35). Steinzor noted that just before the cheating began, Volkswagen wanted to enter the U.S. market, but its vehicles could not meet the country’s emissions standards, which are higher than the requirements in Europe. “It is almost impossible to believe that [in the company’s] marketing department, someone wasn’t aware that there were big problems,” she said (19:30).
2. Recalls aren’t a panacea: With 475,000 Volkswagen vehicles with excess emissions still on U.S. roads, the impact on the environment will persist if owners don’t bring in their vehicles to be fixed, said Orts (09:15). Steinzor said voluntary recalls are “notoriously ineffective,” and that up to 80% of people ignore them, even if they are alerted to safety issues.
3. The impact on shareholders: In a way, Volkswagen shareholders who sold their stocks before the scandal unfolded benefited from the fake emissions test results. “[However], there is no theory or structure to hold [those beneficiaries] accountable,” said Orts (16:30). “Shareholders who are going to get hit now are those who kept holding the stock or bought stock after the crisis unfolded,” he added.
4. The case highlights a need to change corporate culture: Steinzor said wrong corporate structures fuel errant behavior, and referred to General Motors CEO Mary Barra highlighting the “GM Nod” in a report to federal officials outlining what led to that automaker’s ignition switch recall crisis. That “nod” at meetings meant executives agreed on action required on some pressing issue, but failed to take that action. “Until there is an incentive for individuals to step up in that kind of situation, we will continue to see these issues,” said Steinzor (13:48).
5. Will Volkswagen learn from its mistakes? “It is possible in this case that a company that has a really bad experience like this and realizes the damage that can be done to reputation from a serious environmental mistake can sometimes change and get the message and shift,” said Orts (23:35).